Crop Insurance and risk Management for Wisconsin Grape Growers

Report
CROP INSURANCE OPTIONS FOR
WISCONSIN GRAPE GROWERS
Paul D. Mitchell
Associate Professor, Agricultural & Applied Economics
University of Wisconsin-Madison
2013 Wisconsin Fresh Fruit and Vegetable Conference
Wisconsin Dells
January 22, 2013
Grape Production is Risky
• We all know about the crazy weather we had in 2012
• Early spring, late frosts, drought
• Other years it’s been other events
• Large rainfalls/floods, cool wet springs, early frosts, dry
spells, wind/hail etc.
• Farmers have many ways of dealing with these extremes
• Management/Technology: Variety selection, water
misters, smudge pots, etc.
• Crop Insurance: One way to deal with the financial side
of the problem, if management/technology fails
Goal Today: Review Crop Insurance
Options for Wisconsin Grape growers
• Overview of Policy options for Grape growers
• Examples of how they work
• Main idea: Use crop insurance to reduce income
variability from weather impacts
• Can use other ways to manage income variability:
Save extra money, Geographically diversify,
Diversify crops, etc.
• These are all forms of Self Insurance
Main Crop Insurance Policies
• Multi-Peril Crop Insurance (USDA)
1. Written Agreement Grape APH Policy
2. NAP Policy
3. AGR-Lite
• Specific-Risk Weather Insurance (Private)
• Temperature and/or Precipitation Insurance
Crop Insurance Policies
• Multi-Peril Crop Insurance (USDA)
• Covers losses from multiple perils: frost, excess rain,
drought, pests, hail, tornado, wind, etc.
• Does not cover loses from: bad management, theft,
equipment break down, etc.
• USDA develops and/or administers these policies,
though some are sold by private companies
• USDA support means premiums are subsidized
• Specific Risk Weather Insurance (Private)
• Insures against specific weather events:
• Private companies: Premiums not subsidized
How Multi-Peril APH Crop Insurance Works
• Establish your average yield/production based on yield or
production records
• Choose a percentage of this yield to guarantee
• Options: 50%, 55%, 60%, 65%, 70%, 75%, 80%, 85%
• Yield below this guarantee triggers indemnity
• Choose price to be paid for losses
• Set by USDA RMA each year
• Varies by year, type/variety and location:
• Grapes in Berrien County, MI 2013:
• $260/ton for Type A and Niagara grapes
• $1025 for Type B grapes
Michigan counties
with existing Grape
APH Policy
Three Types:
1) Type A: Buffalo, Clinton,
Concord, Elvira, Fredonia,
Missouri Riesling, and
Steuben
2) Niagara
3) Type B: Catawba,
Delaware, Diamond,
Dutchess, French Hybrids,
Isabella, and Ives
Grape APH Example
• Suppose have a 10 acre vineyard with production records
showing an average yield of 6 tons/ac
• Average production 6 x 10 = 60 tons
• Coverage level options
• 50% x 60 tons = 30 ton guarantee
• 55% x 60 tons = 33 ton guarantee
• 60% x 60 tons = 36 ton guarantee
• 65% x 60 tons = 39 ton guarantee
• 70% x 60 tons = 42 ton guarantee
• 75% x 60 tons = 45 ton guarantee
• 80% x 60 tons = 48 ton guarantee
• 85% x 60 tons = 51 ton guarantee
Grape APH Example
• Continuing this example, suppose they are Type A grapes
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with a price of $260/ton offered by RMA in 2013
Can choose 100% to 55% of this price
• Most people choose 100% price election
Suppose chose 75% coverage level (45 ton guarantee)
Actual harvest is 35 tons from the vineyard
Loss is 45 – 35 = 10 tons
Indemnity is 10 x $260 = $2,600
Premiums: Rules of Thumb
• Higher coverage level means a higher premium
• Higher grape price means a higher premium
• Lower average yield means “riskier” and a higher premium
• Govt subsidizes premiums with higher subsidy for lower
coverage, so higher coverage means higher premiums
Coverage Level Govt Subsidy Grower Share
50%
67%
33%
55%
64%
36%
60%
64%
36%
65%
59%
41%
70%
59%
41%
75%
55%
45%
80%
48%
52%
85%
38%
62%
Grape APH Premiums for Berrien County, MI
• Assume a 6 ton/ac average
• 2013 prices: $260/ton Type A and $1025/ton Type B
Coverage Premium $/ac Premium $/ac Premium as %
Level
Type A
Type B
of Liability
50%
$37.70
$148.50
4.83%
55%
$47.90
$188.80
5.58%
60%
$55.20
$217.50
5.90%
65%
$72.30
$285.20
7.13%
70%
$89.50
$352.80
8.20%
75%
$122.60
$483.50
10.48%
80%
$178.00
$701.70
14.26%
85%
$266.80
$1,052.00
20.12%
Liability = Coverage Level x 6 tons/ac x Price
Grape APH Policy in Wisconsin: By
Written Agreement Only
• Wisconsin does not have a Grape APH policy available
• Written Agreement: USDA-RMA will in some cases
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provide growers with an APH policy based on an existing
policy in a nearby county (e.g., Michigan)
Wisconsin growers can request a Written Agreement
working with their crop insurance agent and the RMA
Key issue: Vines must be at least 5 years old and you
need at least 3 years of good production records
• Verifiable records = sales receipts
Takes extra work for crop insurance agent and RMA, so
start early and ask about the production history you need
Sales closing date: November 20
2nd Alternative: NAP Policy
• USDA Farm Service Agency manages the “Noninsured
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Crop Disaster Assistance Program” (NAP)
FSA mandated to provide a NAP policy when a traditional
crop insurance policy is not available
NAP policy is a Catastrophic Policy (CAT), which is a
specific type of APH policy
NAP policy: Cheap, bare bones CAT policy that costs
$300/crop in a county, regardless of acres/crop value
Where do I buy it? County FSA Office
Sales closing date is also November 20
Still need production records to establish guarantee
NAP Policy
• NAP is a CAT policy: must use 50% coverage level with a
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55% price election
FSA establishes the price (likely to use RMA data)
CAT: must lose half your average crop before start to
receive payments and then only 55¢ per $1 of loss
Max that NAP policy will pay = 50% x 55% = 27.5% of
crop value if a total crop loss
With 6 tons/ac average and $260 price, a total crop loss
would pay 55% x $260 x 50% x 6 = $429/ac
Buy a NAP policy while establish yield records and wait
for vines to age to qualify for a written agreement?
Buy a NAP policy so qualify for federal disaster aid?
• I have not asked FSA if they require the 5-year vine age
rule before providing a NAP policy
Tree Assistance Program (TAP)
• These crop insurance policies only cover production
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losses, not vine losses
Federal disaster assistance helps with vine losses
Tree Assistance Program (TAP) was extended as part of
the Farm Bill Extension passed with Fiscal Cliff deal
Can request FSA for disaster aid to replant vines
• Need at least a 15% stand loss
• Must replace the stand within 1 year
• Must have the crop production insured
Contact county FSA office for more details
Buy a NAP policy so qualify for federal disaster aid?
3rd Alternative: AGR-Lite Policy
• AGR-Lite = Adjusted Gross Revenue-Lite
• Whole farm revenue insurance
• Gross revenue guarantee based on 5-year average of
Schedule F income
• Some adjustments (Adjusted Gross Revenue)
• Lite: $1,000,000 liability (max indemnity) limit
AGR-Lite: Main Idea
• Use past tax records to determine expected gross
revenue for 2013
• Choose % of this expected gross as farm
revenue guarantee (Coverage Level)
• 65%, 75%, 80% coverage level
• Choose payment rate (90% or 75%)
• For every dollar below guarantee, paid 90¢ or 75¢
• After file taxes for 2013, if actual gross revenue is
less than chosen guarantee, receive an indemnity
based on chosen payment rate
Hypothetical Example
Year
2007
2008
2009
2010
2011
5-year avg
2012
2013
AGR Income
$85,000
$95,000
$115,000
$95,000
$110,000
$100,000
“Skip Year”
Coverage Year
These all “adjusted”
gross revenues
Choose coverage
level for revenue
guarantee based on
this amount
2012 tax forms
not field yet
Available AGR-Lite Options
Coverage
Level
65%
Payment
Rate
75%
Minimum
# Crops
1
Max Annual
Income
$2,051,282
Premium
Subsidy
59%
65%
90%
1
$1,709,402
59%
75%
75%
1
$1,777,778
55%
75%
90%
1
$1,481,481
55%
80%
75%
3
$1,666,667
48%
80%
90%
3
$1,388,889
48%
Hypothetical Example Continued
• Suppose have 75% coverage level and 90% payment rate
• Guarantee = 75% x $100,000 = $75,000
• Actual Adjusted Gross Revenue = $50,000
• Loss = $75,000 – $50,000 = $25,000
• Indemnity = 90% x $25,000 = $22,500
• Max Indemnity = 90% x $75,000 = $67,500
What’s Excluded? The “Adjusted” in AGR-Lite
• Value added activities: (e.g., cost and value of
post-production sorting, packaging, etc.)
• Cooperative dividends not directly related to
commodities produced
• Income from custom hire machine work
• Most other USDA payments (e.g., disaster)
• Crop insurance indemnity payments
Insured & Excluded Causes of Loss
• Insured Losses: Revenue losses from natural
causes (yield) or from market fluctuations (price)
• Must still follow good farming practices
• Excluded causes of loss
• Theft, vandalism, “mysterious disappearance”
• Lack of labor (e.g., to harvest ripe crop)
• Inability to market commodities due to quarantine,
boycott, ore similar
• Failure of buyer to pay for commodity
Covered Crops:
• Grains: corn, soybeans, wheat, small grains
• Forage: alfalfa, corn silage, silage, …
• Fruit: apples, grapes, pears, peaches, plums, cherries,
cranberries, numerous berries, …
• Vegetables: Potatoes, sweet corn, beans, peas, carrots,
onion, beets, garlic, celery, cabbage, broccoli, cauliflower,
melons, squash, pumpkins, tomatoes, peppers, eggplant,
greens, asparagus, horseradish, …
• Livestock: cattle, hogs, sheep, goats, poultry, dairy, fish,
fur, …
• Miscellaneous: mint, ginseng, popcorn, herbs, maple
syrup, honey, X-mas trees, nursery crops, cut flowers,
potted plants, …
What’s Not Covered
• Covered crop/livestock must generate income to
report on tax forms, so crops marketed through
livestock are not covered
• Forage if sold it is covered, but not if it is fed to dairy cows
(but the milk is covered if sold)
• Grapes used to make wine not covered because they are
never sold and so do not generate income for taxes
• Coverage based on Gross Income, not net income
• No indemnity for higher costs, such as a dry year when
have to run irrigation more or buy forage for livestock
and/or dairy
• No more than 50% of your farm income from ag
commodities purchased for resale
More AGR-Lite Details
• Calculate average gross revenue from 5 continuous years
of tax forms
• Must have 5 consecutive years of Schedule F/1040 records
• Combine AGR-Lite with standard crop-specific policies to
reduce total premiums paid
• Use Revenue Protection/Yield Protection for grains
• APH for your apples, etc.
• Gives a premium break for standard policy
• Give specific coverage for those crops
• AGR-Lite an “umbrella” over whole farm
How AGR-Lite does premiums
Calculate % revenue for each “crop”
A crop generates at least 1/9th (11.1%) of gross revenue
Crops categorized from low risk (1) to high risk (5)
Each crop risk category has base premium rate
Final premium rate is average of the premium rates,
weighted by % of revenue from that crop
• Diversity Factor: as have more crops, lower premium
• Premium for 5 crops is less than for 3 crops with the
same risk level
• Premium subsidy: farmer pays 41%, 45%, 52% of
premium, with lower % for lower coverage
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Hypothetical Premium Example
• $100,000 avg revenue with 75% coverage level
and 90% payment rate gives $75,000 guarantee
and liability of $67,500 (= 90% x $75,000)
• 75% revenue from crop 1, 25% from crop 2
• Crop 1 premium rate = 0.10, Crop 2 premium rate = 0.05
• Revenue Weighted Average rate
• 75% x 0.10 + 25% x 0.05 = 0.0875
• Diversity factor = 0.667 x 0.0875 = 0.0584
• Premium is 0.0584 x $67,500 = $3,942
• Premium subsidy is 55%, so farmer pays 45%, or
45% x $3,942 = $1,774
Crop Risk Categories
• Category 1: lowest risk
• Oats, Rye
• Category 2: moderately low risk
• Cabbage, Cucumbers, Flowers (Other), Processing
Sweet Corn, Barley
• Category 3: moderate risk
• Asparagus, Beets, Broccoli, Brussels Sprouts, Carrots,
Cauliflower, Garlic, Herbs, Horseradish, Popcorn
Strawberries, Cranberries, Potted Flowers, Seasonal
Potted Plants, Flower Seed, Maple Syrup, Pumpkins,
Processing Summer Squash, Winter Squash
• Corn, Soybeans, Wheat, Alfalfa, Clover, Hybrid Corn
Seed, Forage Production, Other Forage Seeds
Crop Risk Categories
• Category 4: moderately high risk
• Green Peas, Greens, Mixed Vegetables, Fresh Market
Snap Beans, Fresh Market Sweet Corn, Fresh Market
Tomatoes, Onions, Peppers (Other), Eggplant, Dry
Beans, Grapes, Vegetable Seed
• Apples, Plums, Blueberries, Raspberries, Other Berries,
Christmas Trees, Mint, Cut Flowers, Dried Flowers,
Flower Bulbs, Bedding Plants, Ginseng, Other Small
Grains
• Category 5: high risk
• Potatoes, Tart Cherries, Apricots, Peaches, Pears,
Melons (All Other), Celery, Other Vegetables, Other
Crops, Other Fruits
How to get lower premiums
• Get as much of your revenue from low risk crops
as you can
• See if you can get 11.1% of revenue from a category 2
or 3 crop, will reduce your premiums
• Choose general categories with care and group
crops carefully
• Mixed Vegetables (4) vs Other Vegetables (5)
• Flowers (Other) (2) vs Potted Flowers (3) vs Cut
Flowers or Dried Flowers (4)
• If you can, insure the crop under a standard crop
insurance policy, then add AGR-Lite, will save on
total premiums paid over all policies
AGR-Lite Final Comment
• Sales closing date is March 15
• Takes time to assemble records, so start early so agent
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can work with you to identify the best policy for you
All agents sell exactly the same policy for exactly the
same price, so you are buying service
2012: 19 policies in WI: $2.56 million in liability, premiums
of $113,000, premium rate of 4.4%
2011: 24 policies in WI, $5.28 million in liability, premiums
of $175,00, average premium rate of 3.3%
2010: 20 policies in WI: $2.70 million in liability, premiums
of $121,000, average premium rate of 4.5%
Final Possibility: Weather Insurance
• Google “Weather Insurance” Several companies sell
specific risk weather insurance
• Weather event policies for Temperature and/or
Precipitation events
• Custom design a policy for your needs
• Example: For every day minimum daily temperature
below 30ºF from May 1 to May 14 at Weather Station
“Wisconsin Dells 479319”, receive payment of $2,000
• Privately provided, no government premium subsidy
Summary: Crop Insurance Options
• 1) Written Agreement APH policy
• Buy from a crop insurance agent by Nov 20th
• 5 year old vines and 3 years of production history
• 2) NAP Policy
• Buy from FSA county office by Nov 20th ($300/crop)
• Useful for new farmers without records
• 3) AGR-Lite
• Buy from a crop insurance agent by March 15th
• 5 continuous years of tax records
• 4) Weather Insurance
• Buy from weather insurance company
• 5) Tree Assistance Program: Vine kill disaster aid from FSA
Questions?
Comments?
Paul D. Mitchell
• Associate Professor, Agricultural & Applied Economics
• University of Wisconsin-Madison
• Email: [email protected]
• Office: 608-265-6514
• Web: http://www.aae.wisc.edu/pdmitchell/extension.htm

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